AOL-MSN Rivalry Picks Up Speed With Broadband
The Walled Garden is under siege.
America Online launches its latest software package, AOL 8.0, here today with a splashy concert by Alanis Morissette, but it might as well start with a call to battle as Microsoft Corp. gears up for another push against the online giant.
Through a combination of user-friendly technology and clever marketing, America Online has created a virtual community -- dubbed the Walled Garden by outsiders because much of its content is available only to AOL members -- that rivals have found tough to dent.
AOL features such as instant messaging, parental controls on children’s Internet surfing and the familiar “@aol.com” e-mail address have made for a stable subscriber base in an industry in which fickle customers are the norm. AOL boasts more than 26 million U.S. subscribers, compared with about 8 million for Microsoft’s MSN service.
However, as more and more personal computer users migrate from poky dial-up service to high-speed broadband, the competition will intensify and it will get harder for AOL to maintain subscriber growth and profitability, analysts say.
Microsoft, with a seemingly bottomless well of cash, announced it will spend $300 million to support the Oct. 24 launch of its Internet service software, MSN 8. Much of Microsoft’s push will be aimed at getting AOL customers to switch.
And Microsoft, by no means coincidentally, also is kicking things off with a New York launch party, headlined by singer Lenny Kravitz.
The heightened competition and lower profit margins of broadband, plus a brutal drought in online advertising and a widening federal probe of America Online’s accounting practices, explain why the unit has been -- at least from Wall Street’s perspective -- an anvil around the neck of parent AOL Time Warner Inc.
AOL Time Warner’s other businesses -- movies, publishing, cable TV and music -- are performing so well that their combined operating profit growth is expected to rise a robust 16% this calendar year, Merrill Lynch analyst Jessica Reif Cohen said last week in a report.
But when you add America Online, she said, the figure drops to 5%.
As AOL’s network access costs rise in the coming years and the fees it charges consumers fail to keep pace, its EBITDA -- earnings before interest, taxes, depreciation and amortization, a key profit measure -- could shrink to $830 million in 2005 from $2.3 billion in 2001, Cohen added.
“If we did nothing, it could look very much as [Cohen] portrays it,” Jonathan Miller, AOL’s new chief executive, acknowledged in an interview.
“But we’re not going to do nothing.”
Indeed, he said, AOL 8.0 incorporates some 100 improvements over the current version, most of them in response to suggestions from AOL customers.
Miller has high hopes for a “MatchChat” feature that will allow users with similar interests to find one another online. Other features make it easier to block junk e-mail, to share pictures and music and to customize the content of the “home” screen.
For an extra $3.95 a month, dial-up users get a call-waiting service that notifies them of calls without breaking the connection.
The new package also represents “the first time that AOL has really embraced broadband,” Miller said. Not only will such functions as music- and picture-sharing work better and faster on broadband, but there will be new features exclusively for high-speed subscribers, including improved video and CD-quality radio.
Microsoft, meanwhile, is counter-programming with mirror-like precision.
Beyond the rival New York launch parties and the product names both incorporating the number 8, Microsoft’s new offering incorporates for the first time some of the distinctive features of AOL, such as controls that let parents monitor their children’s use of the Internet and block them from certain sites or chat rooms.
But Microsoft is not just matching what AOL offers, said Larry Grothaus, lead project manager for MSN. As a software development company first and foremost, Microsoft “prides itself on great technological delivery,” he said.
Pricing will be one key front on which the broadband competition plays out. MSN is offering broadband at $39.95 and AOL at $44.95.
It appears AOL also is making high-speed service easier to install with a one-click sign-up for DSL service through such telecom partners as Verizon Communications Inc. The cost is an additional $30 a month.
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Times staff writer Edmund Sanders in Washington contributed to this report.
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(BEGIN TEXT OF INFOBOX)
Dueling Debuts
AOL and Microsoft are introducing updated packages for their Internet services this month. A look at their launches:
AOL MSN
Product name AOL 8.0 MSN 8
Launch date Today Oct. 24
Launch party site Lincoln Center, N.Y Central Park, N.Y.
Launch party headliner Alanis Morissette Lenny Kravitz
Marketing budget Won’t say $300 million
